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What are Required Minimum Distributions (RMDs)?
RMDs are the minimum amount you must withdraw from your retirement accounts each year, starting at age 72 (73 if you reach age 72 after December 31, 2022). This applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and other defined contribution plans.
Calculating Your RMD:
- Determine your account balance: Use the balance as of December 31st of the previous year.
- Find your life expectancy factor: Use the IRS’s “Uniform Lifetime Table” based on your age and beneficiary information.
- Divide your account balance by your life expectancy factor: This will give you your RMD for the year.
Important Dates:
- First RMD: April 1st of the year following the year you turn 72 (73 if you reach age 72 after December 31, 2022).
- Subsequent RMDs: December 31st of each year.
Consequences of Not Taking RMDs:
- 50% excise tax on the amount not distributed as required.
- Report the excise tax on Form 5329.
Special Rules for Roth IRAs:
- No RMDs required during the owner’s lifetime.
- Beneficiaries of Roth IRAs are subject to RMD rules.
- Designated Roth accounts in 401(k) or 403(b) plans:
- No RMDs required for 2024 and later years.
- 2023 RMDs due by April 1, 2024, are still required.
Additional Resources:
- IRS Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)
- IRS Publication 560: Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
- IRS RMD Comparison Chart: IRAs vs. Defined Contribution Plans
How the IRS Calculates Life Expectancy:
The IRS publishes an annual table of life expectancy in which the account owner’s age corresponds to a life expectancy factor. The IRS revises this table every year, and the table is used to determine the RMD as the account balance of the owner is divided by the life expectancy factor from this table.
Example:
- John is 72 years old and has a traditional IRA with a balance of $100,000.
- According to the IRS’s Uniform Lifetime Table, John’s life expectancy factor is 25.6.
- John’s RMD for the year is $100,000 / 25.6 = $3,906.25.
Understanding RMDs is crucial for ensuring you comply with IRS regulations and avoid penalties. By following the steps outlined above and utilizing the provided resources, you can calculate your RMDs accurately and manage your retirement distributions effectively. Remember, consulting with a financial advisor can provide personalized guidance and help you navigate the complexities of retirement planning.
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How to Calculate Your Required Minimum Distribution
FAQ
How often does the IRS update the life expectancy table?
Which IRS life expectancy table should I use?
How is the IRS RMD calculated?
How to calculate life expectancy factor for inherited IRA?
What is a life expectancy IRA distribution?
It’s been almost two decades since the IRS updated the life expectancy tables that govern IRA distributions. These tables calculate your annual required minimum distribution (RMD), which is the rate at which retirees over a certain age, now 72, must withdraw income from their retirement accounts or face stiff penalties.
How do I calculate my combined life expectancy?
Your combined life expectancy is at the intersection of your ages. If you are figuring your required minimum distribution for 2023, use your ages as of your birthdays in 2023. For each subsequent year, use your and your spouse’s ages as of your birthdays in the subsequent year. Table III (Uniform Lifetime).
When does the Life Expectancy table apply?
This table generally applies for distribution calendar years beginning on or after January 1, 2022. This table sets forth the life expectancy of an individual at each age. Transition rules under the regulations may apply to certain beneficiaries when the original account owner or their surviving spouse died before January 1, 2022.
What is the life expectancy method?
The life expectancy method is the primary way of figuring out your RMD amounts. RMDs are required distributions that must be withdrawn from certain retirement accounts once the owner reaches a designated age. The RMD age used to be 72, but the passage of SECURE 2.0 Act increased the RMD age to 73.